CAPEX Q2 2015

Q2 2015 witnessed a c.67% drop in project awards from Q1 2015 due to multiple Mega Tier 1 project postponements. These projects have been pushed to the latter half of the year, and thus, H2 2015 remains slightly optimistic

With 2015 witnessing a sharp decline in oil prices, project awards too have continued to see a gradual decline. While this year initially had c.USD 123bn projects planned for award, continuous postponements and cancellations have resulted in only c.USD 77.7bn worth of awards likely to be awarded in the GCC energy market – a c.37% drop from what was originally planned. Furthermore, with mega projects experiencing multiple delays and several retenders, this quarter only saw an additional c.USD 7.3bn worth of project awards – a c.67%* fall from the previous quarter. Of the projects awarded in Q2 2015, a majority took place in Saudi Arabia in the power sector (c.USD 2.5bn), followed by c.USD 1.5bn worth of projects in Kuwait in the gas processing sector. The largest awards of the quarter included: Aramco’s Jizan IGCC Air Separation Unit worth c.USD 1.9bn and KNPC’s Refinery Gas Fractionation Train 5 worth c.USD 1.5bn.

"c.USD 77.7bn worth of awards likely to be awarded in the GCC energy market – a c.37% drop from what was originally planned. "

This fall in project spends witnessed this quarter is due to recurring delays faced by several mega projects in the region. One such country undergoing these issues, is Kuwait. While there were speculations last quarter about Kuwait’s c.USD 14bn Al Zour Refinery (ZOR) being retendered due to bids exceeding the estimated budgets and the possibility of an integration of a petrochemical facility with the refinery, new concerns regarding the project emerge. In order to address this issue of high costs, KNPC retendered package 4 (Tanks & Pipelines) as well as their Feed Pipeline package. While bids have been received and evaluated for package 4, the lowest bid received (proposed by the same consortium who previously submitted the lowest bid) is higher than the original bid and thus causes speculation about the possibility of another retender. In the meantime, while KNPC has obtained final approval from the board for additional funds of $2.6bn, they now await approval from the Supreme Petroleum Council.

Moreover, there have been concerns regarding the impact that the delays faced by ZOR might have on KNPC’s LNG import terminal. As the LNG import terminal will be situated close to the refinery, it will use facilities that will be built under ZOR’s marine package and thus relies on the progression of ZOR. With constant delays in the award of ZOR’s packages, there are possibilities that part of the refinery’s marine package facilities will be built under the scope of the LNG import terminal. If this situation arises, contractors will have to revise their bid strategies by taking into account the changes in scope.

Similarly, the U.A.E. has been facing delays for several of its mega projects which were due for award in H1 of this year. These mega projects include: DEWA’s Hassyan coal fired power plant worth c.USD 3.5bn, IPIC’s Fujairah Refinery worth a combined value of c.USD 3.5bn and IPIC/Mubadala’s LNG Regasification facility worth a combined value of c.USD 1.7bn. While DEWA’s Hassyan coal fired power plant initially faced delays due to issues with feedstock, recent changes in the projects schedule has been due to the lowest consortium submitting two bid prices – one for the original plans to generate 1200MW (600x2) and one for 1800MW (600x3) – resulting in a reevaluation by DEWA of how the project should be executed.

In contrast, IPIC has been delaying both its Refinery and LNG Regasification terminal projects due to financial and feasibility issues. While IPIC is has evaluated bids and is in negotiations with the lowest bidder for the regasification terminal, there are possibilities of a retender in order to attain lower bid prices. Furthermore, IPIC continues to postpone its Fujairah refinery as only two bidders have submitted their bids as part of one consortium. The lack of other bidders could push IPIC to retender the project in hopes of receiving several bids as well as lower bid prices.

While multiple project owners are postponing their mega projects, these projects are deemed to be necessary and have thus only been pushed, not cancelled. Looking at what else is in store for the remainder of the year (Figure 1), we see that the market will witness a significant number of project awards in the refining, oil & gas production and power sectors. Furthermore, using Contax Partners’ tiering methodology (where Tier 1 projects have a 70% or greater probability of going ahead), we expect Tier 1 projects to represent c.USD 43bn of the c.USD 77.7bn planned for the latter half of 2015. A majority (c.USD 24.6bn) of these Tier 1 projects will be seen in Kuwait and Saudi Arabia.

"The market will witness a significant number of project awards in the refining, oil & gas production and power sectors."

While a significant portion of Tier 1 projects in Kuwait are represented by KNPC’s ZOR and LNG Import Terminal, a majority of Tier 1 projects in Saudi Arabia are represented by Aramco’s Fadhili Gas Plant worth a combined total of c.USD 3bn and its Shale Gas Development: System A worth c.USD 3bn. Both projects are currently under the bid stage and are expected to be awarded by the end of the year.

As the GCC energy market continues to have many Tier 1 mega projects planned for award for the remainder of this year, Contax Partners can assist project owners, contractors and suppliers maximize the opportunities associated with these projects, guide them on the underlying risks related to execution and the effects on increasing project workload.

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Contax Partners assists project owners, contractors and suppliers to maximize opportunities associated with these projects, guide them on the underlying risks related to execution and the effects of increasing project workload.

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Since our establishment in 1985, Contax Partners has been the advisor of choice for companies operating within the constantly evolving Middle East, Russia and Africa energy sector. Having operated in the energy market for over 30 years, we have a track record of empowering our clients to win business. Contax Partners is well placed to understand the challenges, and what impact these can have on your growth plans for the Middle East, Russia and Africa.